Economic Capital Management and Supervision

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Overview

Due to the continued and increasing impact of supervisory policies in the field of risk and capital management, AFME has increased its coverage model to include supervisory risk and capital activities.

The Pillar 2 sub-group (P2SG) is a thematic configuration to allow senior AFME membership representatives from the Prudential Board to discuss topic-specific and supervisory matters across Europe (EU and UK) systematically. The P2SG will tie up existing work across AFME that falls under economic capital management and supervisory activities, and also provides a dedicated policy space to discuss supervisory requirements as they have proven to be of continued importance for member firms. As such, the P2SG allows members to share and explore requirements in the field of financial and non-financial risk and capital management and combine their expertise and experience horizontally in order to provide cumulative feedback to policymakers.

The work programme encompasses existing work streams that fall under mandates of established working groups as well as new work streams on specific supervisory initiatives, and standing procedures like ICAAP and SREP. Being mindful of not creating duplication of established work areas, the policy unit will span across financial and non-financial risks.

Committee: Pillar 2 sub-group (P2SG).

Working group:

Solvency Stress Testing WG;
Interest Rate Risk in the Banking Book WG;
SSM FRTB Implementation WG.

Solvency Stress Testing

The Solvency Stress testing WG continues to help members with stress test planning. It also acts as a forum for consolidating industry feedback and engaging with authorities in a constructive way, aiming to stabilise and improve the stress test processes and communications with the official sector. The WG also responds to EBA consultations with a view of improving the stress test methodology.

Documents:
2020 EU-wide Stress Test – Treatment of Balance-Sheet Synthetic securitisation
allocated to Risk Bucket 3

2023 EBA Stress Testing Methodology - AFME’s feedback on the draft ST methodology

EBA Discussion Paper on the future changes to the EU-wide stress test

Interest Rate Risk in the Banking Book

In the context of the ongoing changes in the monetary policy and interest rate environment, AFME has established a working group to consider aspects of the management of interest rate risk in the banking book (‘IRRBB’).

The EBA published its regulatory package on IRRBB, namely:

Guidelines on IRRBB and Credit Spread Risk in the Banking Book (‘CSRBB’);
Draft RTS on Supervisory Outlier Tests (‘SOTs’)
Draft RTS on the Standardised Approach.

These areas are complemented by increased EBA scrutiny of banks interest rate risk management, including hedging and modelling assumptions, and a draft ITS on related supervisory reporting. it is envisaged that our working group will consider and engage with policymakers across these areas as appropriate together with wider aspects of IRRBB that impact member firms.

Key Documents

Briefing Note

AFME Pillar 1 and Pillar 2 capital Overlay Note

Consultation Response

CP12/22 – Risks from contingent leverage

Consultation Response

AFME and ISDA response to the EBA Discussion Paper on prudential treatment of Environmental Risks

Position paper

AFME Position paper on limitations to Capital Buffer usage during the Covid-19 pandemic

Contacts

Jouni Aaltonen

Managing Director

[email protected] +44 (0)20 3828 2671

Constance Usherwood

Managing Director, Prudential

[email protected] +44 (0)20 3828 2719

Mark Bearman

Director, Prudential Regulation

[email protected] +44 (0)20 3828 2675